Colorado has made it increasingly difficult to enforce noncompete agreements and that is largely a good thing. Employees should be able to change jobs, start businesses and use the skills and experience they have built over the course of a career.
But as noncompetes become increasingly verboten in Colorado and most other states, many companies are looking for a backdoor way to achieve the same result by labeling ordinary business information as “trade secrets”.
Often now, when a key employee leaves, starts or joins a competing business, suddenly the old employer claims the employee stole proprietary or confidential information. However, in many cases, the alleged “trade secrets” are nothing more than the knowledge, experience and relationships the employee gained through years of doing the job.
That said, trade secrets are real. If a company truly has proprietary information, it needs to protect it and litigation may be the appropriate course of action. But courts can distinguish between legitimate trade secrets and a bad-faith effort to manufacture an unenforceable noncompete and that is where many businesses make mistakes. It’s an issue we are seeing more and more litigation around and two recent Colorado cases illustrate this.
Case One: The Windows Fight
What happens when customer relationships become the alleged “trade secret”?
I represent a client in an ongoing dispute with his former employer in the replacement windows industry. My client helped grow the prior employer from roughly $2 million in annual revenue to approximately $150 million and personally sold more than $200 million in windows during his tenure there. He was repeatedly promised percent equity in the company and commissions, which were never provided or fully paid. Ultimately, he was terminated for bogus reasons. He then went and started his own company and has done incredibly well.
Now the parties are in a knock-down, drag-out fight involving claims that when my client started his new business, he solicited his prior employer’s customers, stole proprietary data and misused trade secrets.
The problem is that many of the alleged “trade secrets” do not appear to be trade secrets at all. The company claims that customer lists and leads were proprietary. But these were simply the names of people who had done business with the company. And in the window business, where products carry 30-year warranties, the notion that a three-year-old customer list provides some uniquely valuable competitive advantage does not make much sense.
Case Two: Colorado’s Psilocybin Industry
Being first to market does not automatically make something proprietary.
The second example concerns Colorado’s emerging psilocybin industry and litigation involving a healing center and two former healing center employees who left to form a different healing center.
The suit alleges that the employees took trade secrets and intellectual property. However, as in many service-based businesses, there was no secret formula or patented technology. Opening a healing center with similar offerings is not the same thing as stealing the Coca-Cola recipe from the vault. There are over 25 licensed psilocybin spaces in Colorado, many of which offer similar services. Just because a company is first in an industry does not automatically mean its methods are proprietary or novel.
What Counts as a Real Trade Secret?
A legitimate trade secret is something genuinely unique that derives economic value from remaining secret. A formula. Source code. A proprietary manufacturing process. A novel technical method. Something competitors do not know and cannot easily replicate. And if a company wants the courts to protect those assets, it has to actually treat them as secrets and that is where many businesses get themselves into trouble.
Trade secret protection depends heavily on whether the company took reasonable steps to protect the information in the first place. Courts will look at things like password protections, restricted access, confidentiality policies, employee agreements, device controls and offboarding procedures. If sensitive information is sitting openly on a company server, accessible to everyone, with no safeguards in place, courts may conclude the business never treated it as confidential to begin with and therefore, it has no trade secrets protection.
The Offboarding Problem
Taking those protective steps is especially important when employees leave. The reality is that modern workplaces create enormous amounts of electronic sprawl. Someone accidentally copies a personal email address in an Outlook message. A PDF downloads automatically to a phone. An employee traveling for work saves documents to a desktop for convenience. Someone logs in to work email from a personal computer and forgets that the files remain stored locally long after they have resigned.
Sometimes employees intentionally take information before leaving. Sometimes it happens accidentally. Both scenarios create risk. If you are a business owner, you need to take reasonable precautions before problems arise. Your handbook should clearly define confidential information and explain how employees should handle it.
For example, if employees use personal devices for work, the company should reserve the right to inspect those devices upon separation to confirm that they did not retain trade secrets. Exit procedures should include recovering devices, reviewing accounts, revoking access and ensuring company materials are deleted from personal systems.
Too many companies wait until litigation starts before they suddenly become concerned about trade secret protection. By then, it may be too late. If former employees can show that the company routinely allowed sensitive information to remain on personal devices or failed to monitor access to proprietary materials, a court may find that the company did not take adequate steps to preserve secrecy.
At that point, the alleged trade secrets may lose legal protection entirely, which can be catastrophic, especially for technology companies where intellectual property and proprietary information are the business’s primary assets.
Courts Draw the Line
At the same time, employees and founders must understand that not every trade secret claim is legitimate. Former employees are allowed to draw on general knowledge, industry experience, relationships and skills developed over the course of their careers. Companies cannot simply rebrand ordinary know-how as proprietary information to prevent competition and Colorado law increasingly recognizes that distinction.
However, with noncompetes increasingly off the table, I expect this issue to keep arising. The challenge will be for companies to ensure they are protecting genuine trade secrets rather than trying to create an unenforceable noncompete after the fact.
Henry Baskerville is an experienced litigator who represents clients in complex commercial litigation, white-collar criminal investigations, government contracting matters and construction disputes. He serves as an outside general counsel to small businesses and startups and also represents clients in the cannabis and healthcare industries.